How many times have we sat around a boardroom table listening to remuneration discussions and have no idea what the terminology means – but we nonetheless nod our heads in agreement so as not to seem ignorant? The irony is, many of these seemingly confusing terms have simple definitions – illustrating that as humans, we tend to overcomplicate too many business principles.
Basic salary versus cost to company
We will begin by exploring basic salary versus cost to company (CTC). How many of us have been for interviews over the years and received offers only to discover that our previous net salary may have been more than the new net salary, despite the gross offer being substantially more? Were you short changed, and if so, how? The answer could be that in your previous company, you were provided with a basic salary, whereas the new offer is a CTC. What is the difference between the two?
A basic salary consists of a cash component with the company contributing over and above this towards your benefits, such as 50% towards medical aid or a certain percentage towards the provident fund. A CTC, on the other hand, is the total cost associated to a company. The company allocates an amount to you, and your salary and all benefits come out of this CTC in full. In other words, full benefits are paid by the employee.
Guaranteed pay versus variable pay
Variable Pay is a pseudonym for a short-term incentive such as a bonus or commission, and/or a long-term incentive such as shares. Both are based on performance and are determined by individual, team and/or company performance. On the other hand, a guaranteed package includes your cash remuneration and benefits that are paid monthly. Just like its name states, it is a certainty that you’ll receive every month, since it is not based on individual or company performance.
Internal equity versus external equity
So what is internal and external Eequity? Equity in terms of pay means that you are being paid fairly and impartially, with no discrimination or bias. Internal equity means that your pay is fair compared to what others in your company are receiving. If your company uses a robust job grading system to determine into which band your job falls within the company’s job structure, then it is likely that internal equity exists.
On the other hand, external equity measures how fairly the company pays in relation to the external market i.e. according to the 50% percentile. This means that the company has benchmarked its salaries in line with its competitors, through the use of external salary surveys.
But what is the 50% percentile? The 50th percentile indicates what the “going rate” for a job is (also known as median or midpoint within a salary range). The 50th percentile is therefore an important tool because it assists with managing remuneration costs by comparing an individual, group or organisation’s salary to the market midpoint, known as a compa-ratio. This is usually depicted in percentage form with companies trying to aim as close to 100 as possible, because this implies that their salaries are close to the midpoint. Anything less than 75% and over 125% should be reconsidered, since it implies underpayment or overpayment respectively, in relation to what is the average being paid in the market.
If an organisation pays below the market midpoint, it does not mean that they are underpaying – it just means that they target a lower point in the market range.
Salary structures and pay scales
The figure below indicates a simple example of a salary structure.
In this example, each block indicates a job grade. Every grade is made up of potentially many jobs in the company: they are grouped together into a grade not because of the nature of the job, but rather because they have similar levels of responsibility, accountability, problem-solving, decision-making and so forth (known as compensable factors). Job evaluation assesses such compensable factors, and determines what grade each job falls into. For example, the job grade (block) on the bottom left (let’s call it Grade 1) might be filled with unskilled positions, whereas the job grade on the top right (let’s call it Grade 5) might be filled with executive-level positions. As an employee is promoted from a job with less skill requirements, responsibility and so forth (e.g. from Grade 1), to a job that requires her to demonstrate more accountability, problem-solving etc. (e.g. to Grade 3), then she is moving up the ‘hierarchy’ (i.e. salary structure) as you can see in the figure – because her job has changed. This explains horizontal movement along the x-axis of this figure, from one grade to another in the company as a person is promoted.
Now let’s consider how the employee moves up the y-axis, i.e. vertical movement. This is how we demonstrate that the employee can earn a higher salary as she is developing competence and demonstrating solid performance. Attached to each of these job grades is a pay range, with a minimum and maximum amount that you could be paid if your job falls in any of the grades. This means that every employee in a grade, no matter what their job is, can earn similar or different amounts to one another.
For example, when an employee first enters Grade 1, she might earn an entry-level salary: i.e. the minimum pay in that grade. As she progress in her skills, obtains good performance reviews, and stays at the company for a number of years, she might receive merit-pay increases. Even if she stays in Grade 1 for a long time, her pay might increase, up to a maximum point, depending on what the company rewards and considers important e.g. performance.
Thus, the distance between the minimum and maximum pay for each grade is known as the pay range.
Hopefully next time you are sitting around the boardroom table, you will remember the wise words that Confucius once said: “Life is really simple, but we insist on making it complicated”. You know more than you think and let’s strive to not overcomplicate the simple when it comes to remuneration.
Penny Petrou is the general manager, and Dr Michelle Renard is an executive consultant 21st Century.